Minimum wage increases and firm-level labor investment efficiency: Evidence from Korea

This study examines the impact of minimum wage increases on firm-level labor investment decisions in Korea, which experienced unprecedented wage hikes during the 2010s. Using 11,619 firm-year observations from KOSPI and KOSDAQ-listed firms, and incorporating industry–year fixed effects and exposure-based measures (MWE), we find that rising minimum wages lead firms to adopt more conservative labor investment strategies. The effects vary with economic conditions: minimum wage hikes curb overinvestment and improve efficiency during expansions (discipline effect), but exacerbate underinvestment during downturns (constraint effect), constraining firms’ hiring and retention. These results remain robust after controlling for exposure heterogeneity and testing around the 2018 minimum wage reform. Our findings underscore the need for minimum wage policies to be aligned with economic cycles to promote optimal labor market outcomes.